Several multi-market trend following strategies are enjoying a strong month in September thanks to extended moves in grains, metals, foreign currencies, and stock index futures. And while these trends have been great for managers like Covenant Capital & Robinson – Langley (both up approximately 8% for the month), these markets have been nasty for short options sellers who have been selling calls in front of these massive rallies. Programs like FCI OSS, FCI CPP, HB Capital, and Liberty Funds Group have unfortunately been taking it on the chin in recent weeks.
FCI president Craig Kendall articulated how they are being affected by the big moves in a letter to clients (FCI Sep2010 letter), explaining that parabolic moves this month in Sugar (+28%), Cotton(+17%), and Coffee (+7%) have been the culprits.
The recent success of the long volatility multi-market managers, seemingly at the expense of the short volatility option selling managers underscores how common it is for both types of strategies to cycle back and forth between good periods and bad. Which we hope would underscore for investors two points:
- Diversify your managed futures portfolio and stay diversified. Those who didn’t panic in 2008 and held onto some short volatility programs were rewarded in 2009. Those who didn’t panic and dump long volatility programs in 2009 are now reaping the benefits. Have exposure to both long and short volatility.
- There will always be some quick down spells for option sellers when volatilty spikes or big moves happen. To lessen the sting, protect short volatility gains by not letting them compound. Read more our past newsletter: Avoid Being a Turkey, Protect Option Selling Gains